AFE - AECI Limited - Reviewed condensed consolidated financial results for the
year ended 31 December 2007
AECI LIMITED
Incorporated in the Republic of South Africa
(REGISTRATION NUMBER 1924/002590/06)
SHARE CODE: AFE ISIN NO: ZAE000000220
REVIEWED CONDENSED CONSOLIDATED FINANCIAL RESULTS FOR THE YEAR ENDED 31 DECEMBER
2007
- Revenue +11%
- Final dividend unchanged
- R1,4b capital programme on track
- Share buy-back announced
INCOME STATEMENT
% 2007 2006
change R millions R millions
Continuing operations
Revenue(2) +13 8 521 7 558
Net operating costs 7 764 6 510
Profit from operations -28 757 1 048
Creation of pension fund employer - 179
surplus account
Release of provision for post- - 131
employment medical aid benefits
Net income from pension fund employer 30 17
surplus account
Net income from plan assets for post- 36 -
employment liabilities
823 1 375
Fair value adjustments on derivative 5 11
instruments
Financing costs (net of costs (159) (143)
capitalised)
Interest received 28 35
Income from associates and investments 12 7
709 1 285
Impairment of goodwill (20) (6)
Other impairments and disposals 2 (15)
Profit before tax 691 1 264
Tax (218) (339)
Net profit from continuing operations 473 925
Net profit from discontinued (6) 28
operations
Profit before tax 46 48
Closure costs (117) -
Impairments and disposals 64 (6)
Tax 1 (14)
Net profit 467 953
Attributable to preference and (12) (37)
minority shareholders
Profit attributable to ordinary 455 916
shareholders
Headline earnings are derived from:
Profit attributable to ordinary 455 916
shareholders
Impairment of goodwill 20 6
Other impairments and disposals before (66) 21
tax
Tax effects of the above items (17) (1)
Headline earnings 392 942
Per ordinary share (cents):
Headline earnings -58 355 853
Diluted headline earnings(3) 352 842
Attributable earnings 412 829
Diluted attributable earnings(3) 408 819
Continuing earnings 417 804
Diluted continuing earnings(3) 414 794
Dividends declared +4 213 205
Dividends paid 213 185
Ordinary shares (millions)(4)
- in issue 110 110
- weighted average number of shares 110 110
- diluted weighted average number of 111 112
shares(3)
BALANCE SHEET
at 31 December
2007 2006
R millions R millions
Assets
Non-current assets 3 558 3 478
Property, plant and equipment 1 568 1 580
Investment property 411 418
Goodwill 986 1 019
Pension fund surplus 226 196
Investments 124 119
Deferred tax 243 146
Current assets 4 699 4 317
Inventory 1 580 1 700
Accounts receivable 2 024 2 242
Assets classified as held for sale 667
Cash and cash equivalents 428 375
Total assets 8 257 7 795
Equity and liabilities
Ordinary capital and reserves 3 788 3 595
Preference capital and minority interest in 141 132
subsidiaries
Total shareholders` interest 3 929 3 727
Non-current liabilities 955 942
Deferred tax 78 35
Non-current borrowings 502 518
Non-current provisions 375 389
Current liabilities 3 373 3 126
Accounts payable 2 021 2 230
Current borrowings 927 797
Liabilities classified as held for sale 250 -
Tax payable 175 99
Total equity and liabilities 8 257 7 795
INDUSTRY SEGMENT ANALYSIS
Revenue Profit from Net assets
operations
2007 2006 2007 2006 2007 2006
R millions R millions R millions
Continuing
operations
Mining solutions 2 778 2 492 163 261 1 377 1 019
Specialty 5 618 4 629 570 511 2 833 2 354
chemicals
Property 451 644 75 314 496 449
Group services,
intergroup and (326) (207) (51) (38) (94) (166)
other
8 521 7 558 757 1 048 4 612 3 656
Discontinued 2 807 2 654 50 54 353 1 073
operations
Decorative 654 774 44 70 (5) 200
coatings
Specialty 15 100 (3) (10) - 38
chemicals
Specialty 2 138 1 780 9 (6) 358 835
fibres*
11 328 10 212 807 1 102 4 965 4 729
Net assets consist of property, plant, equipment, investment property and
goodwill, inventory, accounts receivable less accountspayable. Assets in the
property segment include land revaluation of R375 million (2006 - R405 million).
The net assets of the specialty fibres segment in 2007 include assets, and
directly related liabilities, classified as held for sale.
CASH FLOW STATEMENT
2007 2006
R millions R millions
Cash generated by operations 1 121 1 385
Dividends received 12 7
Financing costs (172) (150)
Interest received 30 36
Taxes paid (196) (202)
Changes in working capital (616) (259)
Expenditure relating to non-current (67) (130)
provisions
Expenditure relating to restructuring (1) (13)
Cash available from operating activities 111 674
Dividends paid (237) (206)
Cash (applied to)/retained from operating (126) 468
activities
Cash generated by/(utilised) in investment 75 (618)
activities
Proceeds from disposal of investments and 37 3
businesses
Proceeds from disposal of discontinued 751 -
operations
Investments (73) (199)
Net capital expenditure (640) (422)
Net cash utilised (51) (150)
Cash effects of financing activities 122 99
Increase/(decrease) in cash and cash 71 (51)
equivalents
Cash and cash equivalents at the beginning 375 409
of the year
Translation (loss)/gain on cash and cash (5) 17
equivalents
Classifed as held for sale (13) -
Cash and cash equivalents at the end of the 428 375
year
STATEMENT OF CHANGES IN EQUITY
2007 2006
R millions R millions
Net profit for the year 467 953
Dividends paid (237) (206)
Revaluation of derivative instruments (1) 6
Foreign currency translation differences (8) 17
net of deferred tax
Changes in the Group (17) 14
Other (2) 3
Net increase in equity for the year 202 787
Equity at the beginning of the year 3 727 2 940
Equity at the end of the year 3 929 3 727
Made up as follows:
Issued ordinary capital 453 453
Non-distributable reserves 271 295
Surplus arising on revaluation of property, 243 261
plant and equipment
Foreign currency translation reserve net of 17 20
deferred tax
Retained earnings of associates 1 1
Other 10 13
Retained income 3 064 2 847
Preference capital 6 6
Minority interest 135 126
3 929 3 727
OTHER SALIENT FEATURES
2007 2006
R millions R millions
Capital expenditure - property, plant and 688 433
equipment
- expansion 381 239
- replacement 307 194
Capital commitments 1 251 650
- contracted for 340 91
- not contracted for 911 559
Future rentals on property, plant and 253 290
equipment leased
- payable within one year 77 65
- payable thereafter 176 225
Net contingent liabilities and guarantees 140 121
Net borrowings 1 001 940
Gearing (%) 25 25
Current assets to current liabilities 1,4 1,4
Net asset value per ordinary share (cents) 3 430 3 255
Depreciation - continuing operations 164 152
- discontinued operations 69 71
NOTES
(1) Basis of preparation and accounting policies
The condensed consolidated financial results have been prepared in accordance
with the historic cost convention except for certain financial instruments which
are stated at fair value. Accounting policies have been applied consistently by
all entities in the Group and are consistent with those applied in the previous
financial year.
The condensed consolidated financial results comply with the Listings
Requirements of the JSE Limited, International Financial Reporting Standards,
the disclosure requirements of IAS 34 - Interim Financial Reporting and the
South African Companies Act, 1973, as amended.
(2) Includes foreign sales of R1 533 million (2006 - R1 271 million).
(3) Calculated in accordance with IAS 33. The Company has purchased call options
over AECI shares which will obviate the need for the Company to issue new shares
in terms of the AECI share option s cheme. In practice therefore there will be
no future dilution
(4) Net of 10 311 120 (2006 - 10 311 120) treasury shares held by a subsidiary
company.
(5) Disposal groups and discontinued operations
With effect from 1 October 2007 the entire interest in Dulux was sold for a
consideration of R745 million and realised a profit of R394 million after tax.
During the year the businesses of SANS Fibres wereeither discontinued or
earmarked for future sale. Closure costs and impairments in respect of these
businesses amounting to R358 million after tax have been charged against income
in the year to31 December 2007. Dulux and SANS have been classified as
discontinued operations and the comparative figures adjusted accordingly.
(6) The auditors, KPMG Inc., have reviewed these condensed consolidated
financial results. The auditors` unqualified review report is available for
inspection at the Company`s registered office.
(7) The condensed consolidated financial statements do not include all of the
information required for full annual financial statements and should be read in
conjunction with the consolidated annual financial statements for the year ended
31 December 2006.
The preparation of financial statements requires management to make judgements,
estimates and assumptions that affect the application of policies and reported
amounts of assets and liabilities, income and expenses. The estimates and
associated assumptions are based on historical experience and various other
factors that are believed to be reasonable under the circumstances, the results
of which form the basis of making the judgements about carrying values of assets
and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates.
COMMENTARY
Performance
Headline earnings of R392 million, equivalent to 355 cents per ordinary share,
were 58 per cent lower than in 2006. The current year`s headline earnings are
stated after charging R108 million after tax (R117 million before tax) in
respect of closure costs at SANS Fibres (SANS). In 2006, the inclusion of R233
million after tax, following an agreement concluded with the AECI Pension Fund
to create an employer surplus account, and a once-off profit of R223 million
after tax on the sale of a surplus property at Milnerton, boosted results. In
the current year, the Group earned R47 million income after tax on the assets
created out of the pension fund surplus. If the effect of these transactions is
excluded, headline earnings were R453 million, or 410 cents per share, compared
with R487 million, or 441 cents per share, in 2006, a reduction of 7 per cent.
Despite the reduction in profit, the directors are sufficiently confident about
the future to maintain a final dividend of 141 cents per ordinary share. The
dividend declaration is published in full elsewhere.
Group revenue increased by 11 per cent in total in 2007 whilst revenue from
continuing operations increased by 13 per cent, reflecting some pleasing growth
in the mining and specialty chemicals sectors. However, with high oil prices
impacting on oil-based raw material costs, extended commissioning of new
detonator manufacturing equipment and intense competition in the shocktube
market, margins were under pressure. The operating margin on continuing
operations declined to 9 per cent from 14 per cent in 2006.
African Explosives Limited (AEL) recorded strong growth in volumes and sales in
the surface market sector in South Africa and its businesses in Africa. In South
Africa, however, the narrow reef market was impacted severely by lower volumes
and intense competition. The slower than planned ramp-up of the first phase of
automated production of initiating systems at Modderfontein, owing to larger
than expected inter-batch variations in the powder drying section of the plant,
also contributed to AEL`s disappointing decline in trading profit. A technical
solution to the plant problem has been found and production rates for the first
phase of the automation project are expected to increase to full design capacity
during the second and third quarters of 2008. Final completion and commissioning
of the second phase of the project is underway and production is expected to
increase to over 85 per cent of design capacity of 80 million detonators by the
end of 2008.
Chemical Services (Chemserve) recorded a creditable 13 per cent increase in
trading profit in 2007. Organic growth accounted for virtually all of the
improvement, with some contribution from two small acquisitions. Although the
drop-off in certain manufacturing sectors had an adverse effect, Chemserve
benefited from innovative vendor management in platinum, gold and base metal
mining in Southern Africa; infrastructure development which created demand for
construction chemicals and related products; and consumer-driven markets such as
food, coatings, household and personal care products and some white goods. The
year was significant in terms of Chemserve`s capital programme, with major
projects underway for the construction and expansion of manufacturing capacity.
Most of this is in the area of mining chemicals and it is expected that the
investments will deliver significant benefits from 2009.
After a record performance in 2006, the property activities managed by Heartland
had a more subdued year and trading profits were R75 million, net of R83 million
of remediation costs. Net cash outflow totalledR48 million after expenditure of
R66 million on remediation and R70 million expenditure on infrastructure. Sales
of 86 hectares of land were achieved in the year compared with 160 hectares in
2006.
Disposal groups and discontinued operations
AECI`s strategic focus is increasingly on the supply of specialty products and
services, based on chemistry, to customers in the mining and manufacturing
sectors in Africa and elsewhere. The decorative coatings business, trading as
Dulux, targeting primarily the retail consumer market, was not well aligned with
this strategy. Effective 1 October 2007, therefore, AECI agreed to sell the
Dulux business to ICI plc for a cash consideration of R745 million which was
received prior to the year end. The sale realised a profit after tax of R394
million, which is excluded from headline earnings.
The polyester light decitex industrial (LDI) and heavy decitex industrial (HDI)
businesses of SANS have been under severe pressure for some time owing to
several factors. These include ongoing over-investment in polyester yarn plants
(mainly in the Far East) resulting in surplus capacity and very low prices, and
the lower cost base of manufacturers in the Far East. The highly competitive
situation will not change. Furthermore, SANS` principal local customer for nylon
HDI decided to exit this business. In this context, and after failing to find a
partner or owner which could add value to these components, or to SANS`
operation as a whole, the decision was taken to close these businesses at the
end of December 2007. An impairment chargeof R93 million after tax has been
incurred in respect of these assets and is included in net profit from
discontinued operations in the income statement.
The nylon LDI and the polyethylene terephthalate (PET) polymer businesses were
profitable in 2007 and their immediate outlook remains positive. However, AECI
is actively engaging with several parties interested in purchasing the nylon LDI
and PET businesses which have, therefore, been classified as assets held for
sale. It is expected that the sale of these businesses will be completed within
the next financial year. An impairment charge of R157 million after tax has been
taken in 2007 to write down the assets of these businesses to their expected
sale values.
FINANCIAL
Capital expenditure of R688 million included R381 million for expansion
projects, mainly in respect of the major projects currently under construction
at AEL and Chemserve. The capital expenditure was R455 million higher than the
depreciation charge. Group working capital, including the working capital
component of assets classified as held for sale, increased to R1 897 million,
representing 17,8 per cent of annual sales (excluding businesses sold) compared
with the corresponding figure of 17,1 per cent in 2006.
Notwithstanding the receipt of the proceeds for the sale of the Dulux business,
Group borrowings increased to R1 001 million from R940 million in 2006
reflecting the increased capital expenditure during the year. Cash interest
cover returned to a more normal level of 7 times from the exceptionally high
level of 13 times in 2006. Gearing remained at 25 per cent of shareholder funds,
the same level as in December 2006. No repurchases of ordinary shares were
undertaken during the year. However, the Board has taken the decision to buy
back up to 5 per cent of the Group`s issued shares in the market as and when the
market is favourable, as authorised at the 2006 Annual General Meeting (AGM).
Authority is being sought at the AGM in May 2008 to repurchase up to a further
10 per cent.
The impairments and disposals in the discontinued operations section of the
income statement comprise mainly the profit on sale of Dulux of R394 million
less the non-headline SANS impairment of R314 million.
PORTFOLIO
Reference has already been made to the disposal of Dulux and the closure of part
of the SANS operations in December. The remainder of SANS` businesses are
expected be sold in 2008. In terms of the agreement between SANS and its partner
in the North Carolina, USA joint venture, SANS acquired the remaining 50 per
cent of the shares it did not already own at a cost of R60 million during the
year. This business is also expected to be sold during the course of 2008.
Chemserve acquired two small local businesses during the year.
OUTLOOK
The trading outlook for 2008 appears challenging with the prospect of high oil
prices, a higher interest rate environment, a weaker rand and uncertainty
regarding power supply in South Africa. A weaker rand puts immediate pressure on
the Group`s import costs but assists with exports. Inflationary pressures are
evident in many countries. Therefore, pressure on margins is expected to
continue. The Group will focus on containing operating costs and will seek to
recover increased input costs in the market where possible.
Apart from at SANS, the recent nationwide disruptions in electricity supply have
had a limited impact on the Group`s manufacturing plants. However, the delivery
of products to certain of the Group`s customers was adversely affected,
particularly the mines. As part of the solution to assure a steady supply of
power, the Group is currently investigating co-generation alternatives.
AECI is well-positioned and well-funded to grow both organically and by
acquisition. 2008 should see improved results compared to 2007, particularly
from Chemserve and Heartland. Beyond 2008, the benefits of capital investments
are expected to start delivering significantly improved results in 2009 and
2010.
The condensed consolidated financial results were authorised for issue by the
directors on 25 February 2008.
Fani Titi Schalk Engelbrecht
Chairman Chief executive
Woodmead, Sandton
25 February 2008
Directorate: F Titi (Chairman) +, S Engelbrecht (Chief executive), F P P Baker,
R M W Dunne*+,G N Edwards, Z Fuphe+, M J Leeming+, L M Nyhonyha+, A C Parker+, L
C van Vught+, R A Williams*
*British +Non-executive
Company secretary: A Kennedy
Date: 26/02/2008 07:05:07 Supplied by www.sharenet.co.za
Produced by the JSE SENS Department .
The SENS service is an information dissemination service administered by the
JSE Limited (`JSE`). The JSE does not, whether expressly, tacitly or
implicitly, represent, warrant or in any way guarantee the truth, accuracy or
completeness of the information published on SENS. The JSE, their officers,
employees and agents accept no liability for (or in respect of) any direct,
indirect, incidental or consequential loss or damage of any kind or nature,
howsoever arising, from the use of SENS or the use of, or reliance on,
information disseminated through SENS.